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Kotlikoff: Let’s get real, the US is bankrupt

By Jason on October 29, 2010

“Prof. Kotlikoff says: “The IMF is saying that, to close this fiscal gap [by taxation], would require an immediate and permanent doubling of our personal income taxes, our corporate taxes and all other federal taxes.”

National debts are not a nation borrowing against its future success. They are a benefit for a current generation to the detriment of a future generation. Even the currently created national debts are to avoid this generation being the one to suffer for the accumulated debts of the past and the incredibly bad judgment of predecessors.

Any group that wishes to reduce taxes needs to first prove they can reduce government spending to the satisfaction of the voters. When there already is a national debt the payment of interest on that debt can be a significant annual cost. So reducing the debt should be the priority of those hoping for reduced taxes. Reducing taxes before reducing spending or eliminating the debt is only helpful for the greedy few who personally benefit most from the reduced taxes. The debt obligation passes on to others and future generations.

Future generations will not be so well off they will easily be able to pay of the debt. The greedy type will pull every string they can in the future to keep the debt from being paid by themselves, leaving it as a consequence for the future others.

The real impact of increased national debt is the tax obligation required to pay for the debt. Countries like Canada have high taxes because of the costs of paying for the debt. The greedy get support for demands to reduce the high taxes knowing that in the short-term this can only be done by reduced spending, or further increases in debt. Paying off the debt to reduce taxes takes longer. The worst part is that the greedy promote government spending that suits their interests, like government paid for services that are provided by for-profit businesses rather than through a government body.

Boston University economist Laurence Kotlikoff says U.S. government debt is not $13.5-trillion (U.S.), which is 60 per cent of current gross domestic product, as global investors and American taxpayers think, but rather 14-fold higher: $200-trillion – 840 per cent of current GDP. “Let’s get real,” Prof. Kotlikoff says. “The U.S. is bankrupt.”

Writing in the September issue of Finance and Development, a journal of the International Monetary Fund, Prof. Kotlikoff says the IMF itself has quietly confirmed that the U.S. is in terrible fiscal trouble – far worse than the Washington-based lender of last resort has previously acknowledged. “The U.S. fiscal gap is huge,” the IMF asserted in a June report. “Closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 per cent of U.S. GDP.”

This sum is equal to all current U.S. federal taxes combined. The consequences of the IMF’s fiscal fix, a doubling of federal taxes in perpetuity, would be appalling – and possibly worse than appalling.

Prof. Kotlikoff says: “The IMF is saying that, to close this fiscal gap [by taxation], would require an immediate and permanent doubling of our personal income taxes, our corporate taxes and all other federal taxes.

“America’s fiscal gap is enormous – so massive that closing it appears impossible without immediate and radical reforms to its health care, tax and Social Security systems – as well as military and other discretionary spending cuts.”

He cites earlier calculations by the Congressional Budget Office (CBO) that concluded that the United States would need to increase tax revenue by 12 percentage points of GDP to bring revenue into line with spending commitments. But the CBO calculations assumed that the growth of government programs (including Medicare) would be cut by one-third in the short term and by two-thirds in the long term. This assumption, Prof. Kotlikoff notes, is politically implausible – if not politically impossible.

One way or another, the fiscal gap must be closed. If not, the country’s spending will forever exceed its revenue growth, and no one’s real debt can increase faster than his real income forever.

3 Comments

Sawtooth
January 8, 2011

They pretent to pay us, we pretend to work.

Toe Vittore
March 8, 2011

We are on the way down economically but it is not Obamas fold. He got it as a present from the previous government. We know that was on the way and there was no way to solved the problem. Do not accuse Obama. He has nothing to do with it and no way to solve the problem. We have to leave with it. The younger generations will pay the price. Good luck to them. Toe Vittore

Toe Vittore
March 8, 2011

Professor Kotlikoff, we knew that was on the way and nothing we can do. The youngest generation will pay the price. After Clinton era our life has been changed dramatically and no other president did anything for it. Now they accusing Obama that he created this economical mess . Well for the time been we have to leave with this and hope a solution will be on the way. Tom Vittore